|
Correct Answer: information asymmetry.
the concept of information asymmetry deals with the disparities in information among parties involved in a transaction or agreement. in these scenarios, one party possesses more or better information compared to the other. this difference in knowledge can significantly impact the decisions made by each party and the overall outcomes of transactions.
information asymmetry is particularly prevalent in markets where the seller knows more about the product or service than the buyer. classic examples can be seen in used car sales, real estate, insurance, and financial services. in these cases, the seller might be aware of defects or issues that are not visible or known to the buyer, potentially leading to a misinformed purchase decision by the buyer.
economists george akerlof, michael spence, and joseph stiglitz conducted pioneering work in this area, which earned them the nobel prize in economics in 2001. akerlof’s seminal paper, "the market for lemons," illustrates how markets where sellers have more information than buyers about product quality can lead to market failure. in his example, sellers of used cars have better knowledge about the condition of the cars they are selling than potential buyers. without a way for buyers to verify this information or trust in the quality of the cars, the market can become flooded with low-quality cars ("lemons"), driving out the good-quality cars and causing a collapse in market confidence and efficiency.
information asymmetry can also create what is known as moral hazard and adverse selection. moral hazard occurs when one party in a transaction has an incentive to take unusual risks because the cost of those risks will be borne by the other party. for example, if someone has insurance, they might be more likely to take risks because the insurance company will cover the associated costs. adverse selection refers to a situation where poorer quality products or higher risk individuals are more likely to be selected. for instance, in the health insurance market, individuals who believe they will need health care are more likely to buy insurance, potentially leading to a predominance of higher-risk individuals covered under health plans.
mitigating information asymmetry is crucial for ensuring fairness and efficiency in markets. this can be achieved through regulations that enforce transparency and disclosures, as well as mechanisms like warranties and certifications that provide assurances to less informed parties. overall, understanding and addressing information asymmetry is vital for policymakers, businesses, and consumers alike, as it affects decision-making and market stability.
|
ExamEdge's online practice test is that they mimicked the actual exam. I walked into the exam feeling confident I knew the material and walked out knowing my time studying with Exam Edge was well worth the effort."
Back To General Exam Info